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Financial Services Law Insights and Observations

CFPB proposal would apply ATR requirements to PACE financing

Agency Rule-Making & Guidance Federal Issues CFPB PACE Consumer Finance Consumer Protection EGRRCPA Ability To Repay TILA Regulation Z

Agency Rule-Making & Guidance

On May 1, the CFPB announced a proposed rule which would prescribe ability-to-repay (ATR) rules to residential Property Assessed Clean Energy (PACE) financing and apply TILA’s civil liability provisions for violations. The proposal, required by Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, would amend Regulation Z to address how TILA applies to PACE transactions to account for the unique nature of PACE loans. PACE loans are designed to finance clean energy improvements on a borrower’s home and are secured by that residence. The Bureau explained that the loans are repaid through a borrower’s property tax payments, which increase over time and which remain with the property even if the borrower sells the property.

If finalized, the proposed rule would require lenders to assess a borrower’s ability to repay a PACE loan and would (i) clarify an existing exclusion to Regulation Z’s definition of credit relating to tax liens and tax assessments to provide that this specific exclusion “applies only to involuntary tax liens and involuntary tax assessments”; (ii) make several adjustments to PACE financing loan estimate and closing disclosure requirements, including providing new model forms specifically designed for PACE transactions, and exempting PACE transactions from the requirement to establish escrow accounts for certain higher-priced mortgage loans and from the requirement to provide periodic statements; (iii) prescribe ATR requirements for residential PACE financing that account for the unique nature of these transactions; (iv) provide that a PACE transaction is not a qualified mortgage; (v) extend TILA Section 130’s ATR requirements and liability provisions to any “PACE company” with substantial involvement in making credit decisions for a PACE transaction; and (vi) clarify how PACE and non-PACE mortgage creditors should consider pre-existing PACE transactions when originating new mortgage loans.

The proposed effective date is at least one year after the final rule is published in the Federal Register (“but no earlier than the October 1 which follows by at least six months Federal Register publication”), with the possibility of a further extension to ensure compliance with a TILA timing requirement. Comments on the proposed rule are due July 26 or 30 days after publication in the Federal Register, whichever is later.

To accompany the proposed rule, the Bureau released several fast facts breaking down and clarifying proposed coverage and the suggested changes. The Bureau also released a data point report documenting research findings on PACE financing in California and Florida from July 2014 through June 2020. Among other things, the report found that PACE loans create an increase in negative credit outcomes for borrowers, particularly with respect to mortgage delinquency. Additionally, PACE borrowers were more likely to have higher interest rates and increased credit card balances and were more likely to live in census tracts with higher percentages of Black and Hispanic residents relative to the average for their states. The report noted that “PACE outcomes improved significantly in California after that State began requiring PACE companies to consider ability to pay before making a loan.”